The Treasury's review of its environmental
tax strategy
The review
44. Our previous report in this series, Pre-Budget
Report 2001: A New Agenda?, critically examined the extent
to which the Treasury could be said to have a strategy for the
use of fiscal incentives to further environmental objectives.[69]
One of the key points we made was that the Statement of Intent
on Environmental Taxation was not in itself a strategy. It simply
sets out an overall aim and a set of criteria which any environmental
tax proposals would need to satisfy. It needs to be underpinned
by a more detailed set of objectives and specific targets which
set out how that aim is to be fulfilled, together with a mechanism
for monitoring progress on a regular basis.
45. In PBR 1999 and subsequent documents, the Government
restated the Statement of Intent and also included a further criterion
which proposed environmental taxes have to satisfy. We have previously
expressed our concern at these changes, including the subtle changes
in wording of the overall aim which suggest that the Government
has sought to shift the emphasis from bringing about a strategic
shift in the burden of taxation to a much more limited policy
based on a case-by-case approach.[70]
In particular, we note that a key sentence of the original Statement
of Intent—"Over time, the Government will aim to reform
the tax system to increase incentives to reduce environmental
damage" —became redrafted in the 1999 Pre-Budget Report
to read "The Government will consider using the tax system
to deliver environmental benefits on a case by case basis, taking
account of its wider economic and social objectives"—a
formulation which has been used extensively by the Treasury in
characterising its approach since then.
46. The Treasury's responses to our recommendations
and concerns in this area has been disappointing—in particular
to the practical suggestions we made last year on ways in which
the Treasury could implement a more comprehensive environmental
tax strategy.[71] In
addition, where we have requested supplementary memoranda in response
to specific questions, the responses have sometimes been perfunctory
and inadequate—in marked contrast, for example, to the supplementary
memoranda we have received from the Department of the Environment,
Transport and the Regions (DETR) in relation, for example, to
budgetary issues and the Climate Change Levy.[72]
47. We were therefore surprised and delighted that,
in Budget 2002, the Treasury should announce a review of its environmental
tax strategy.[73] We
are rather less happy about either the process by which the review
was conducted or by the outcome of the review. With regard to
the process, apart from the very brief mention in Budget 2002
there was no public announcement of any kind. No terms of reference
were formally set, and the review was conducted in relative secrecy.
The Treasury told us that "The Government did not undertake
a wider consultation as the aim of the review was not to gain
general views on the way it has taken forward environmental taxation.
Instead, the aim was to seek opinions on the approach which it
has taken until now from specific groups...which have a particular
interest and to reflect on these before the Government set out
its principles and approach for the future".[74]
Elsewhere, it states that the objective of the review was to consider
experience in implementing environmental taxes to date and then
set out the principles which the Government believes should underpin
use of environmental taxes along with its approach to implementing
them.[75]
48. Our concern about the process is heightened by
the disappointing outcome of the review. The Treasury has subsequently
confirmed to us that the associated document, Tax and the Environment,
is in fact to be the only output.[76]
We welcome the renewed commitment to the Statement of Intent which
this document includes. Tax and the Environment also includes
a more extensive justification for market intervention, and also
extensive advice on the range of considerations to be taken into
account in developing policies in this area.[77]
49. Yet this document, for all its elegance as an
economic and policy development treatise, certainly does not amount
to an environmental tax and fiscal strategy: it is unclear to
us in what way either the review or this document will help the
Treasury develop its approach and implement its strategic objective
of shifting the burden of taxation from 'goods' to 'bads'. The
review therefore does nothing to address our critical comments
and recommendations in our previous report on PBR 2001.[78]
50. This issue is brought into sharp focus by the
fact that the Treasury's latest Public Service Agreement (PSA)
now includes a specific objective "to protect and improve
the environment by using instruments that will deliver efficient
and sustainable outcomes through evidence-based policies".[79]
To some extent, this makes up for the fact that the 'shifting
the burden' objective, included in its 1998 PSA, was dropped in
the 2000 PSA.[80] However,
it is a far cry from the objective set out in the Statement of
Intent—namely that "over time, the Government will
aim to reform the tax system to increase incentives to reduce
environmental damage. That will shift the burden of tax from 'goods'
to 'bads'".[81]
We also note that the new objective, unlike most of the other
Treasury objectives, does not include any target—in itself
visible evidence of the absence of a strategy. We have cited elsewhere
in this report specific examples of ways in which it could do
this—such as targets for biofuels, and for matching funding
to support modulation in the agriculture sector.
51. Apart from objectives and specific targets, an
environmental tax and fiscal strategy would also involve regular
evaluation and monitoring. This is an aspect which will assume
increasing importance in the next few years. We do not think the
Pre-Budget Report provides an adequate context for monitoring
and evaluation in the systematic and more detailed manner which
will be needed. It does not, for example, set out in any systematic
form what research is being conducted in different areas and what
the results of such research are; nor does it contain any analysis
of take-up or trends where taxes are being used for environmental
ends (eg fuel duties, or enhanced capital allowances). Furthermore,
the appraisal tables require far more explanation with regard
to the assumptions and methodologies used. For all these reasons,
we see a need for the Treasury to produce an annual report on
its environmental tax strategy and the progress being made.
52. While the Treasury's review of its environmental
tax strategy is welcome, we question the process by which the
review was conducted and its outcome. In particular:
- No terms of reference were formally set, and
the review was conducted in relative secrecy.
- Tax and the Environment
is to be the only output from the review. Yet this document is
not a strategy, and it fails to spell out how the Treasury is
to shift the burden of taxation from 'goods' to 'bads'.
- While the Treasury's latest Public Service
Agreement now includes an environmental objective, no targets
have been set for it, and
- A strategy also requires a mechanism for regularly
evaluating and monitoring progress, and the Treasury should produce
an annual report to do so.
Tax policy and the environment
53. The Statement of Intent on Environmental
Taxation reads like a campaigning manifesto: only towards the
end—almost as an afterthought—does it include a short
paragraph stating that environmental taxes would need to satisfy
some general criteria applying to all taxation.[82]
However, in subsequent documents we have seen a much greater emphasis
on these criteria at the expense of the main strategic objective.
In addition, the criteria have been made more specific to environmental
taxes—such as the requirement introduced in 1999 that proposals
must be based on sound evidence[83]
—and have become hoops through which any proposal has to
jump through before it can be approved.
54. As a specific example of this inequality of treatment,
we cite the Government's decision to raise significantly the rate
of employers' National Insurance contributions, after reducing
it slightly to counterbalance the introduction of the Climate
Change Levy.[84] Not
only has this decision totally destroyed the presentational case
of revenue neutrality which the Government emphasised in selling
the Climate Change Levy to business;[85]
but it is also a specific example of a significant tax change
which has not—so far as we are aware— been subject
to any appraisal of its social consequences in terms of employment.
55. In placing such emphasis on a formal set of
criteria for environmental taxation and the development of proposed
environmental taxes, the Government has now effectively put in
place a more stringent regime than exists in any other area of
taxation. Our concern is that these criteria may act as barriers
to the introduction of further environmental taxes. Indeed, we
are entitled to ask what criteria govern other tax regimes, and
what overall balance the Government seeks to achieve between different
tax regimes such as income tax, property taxes, and National Insurance.
Where are the formal documented tax strategies which underpin
these?
Valuing environmental impacts
56. We note that the Treasury is placing increasing
emphasis on calculating the monetary value of environmental impacts—in
particular in the Pre-Budget Report associated document Tax
and the Environment.[86]
Indeed, the initial levels of both the Landfill Tax and the Aggregates
Levy were based on such calculations; and we saw earlier in this
report that the Treasury had costed the environmental benefits
of bioethanol at only 5p per litre in comparison with ordinary
petrol.[87] This raises
questions about the adequacy of monetary valuations, and how much
weight to place on them in the light of the huge uncertainties
which exist about environmental impacts. In this respect, there
is a degree of tension between the precautionary principle and
the desire for "evidence-based polices".[88]
57. We have always argued in favour of the 'polluter
pays' principle and that policy making should take full account
of environmental impacts. However, we are concerned about a possible
over-emphasis on monetary valuation by the Treasury for a number
of reasons:
- there are huge uncertainties about the scale
and nature of environmental impacts arising from human activities;
- there are serious issues of principle involved
in attempting to place monetary values on some environmental impacts
even when the latter are fully understood;
- valuations can only reflect our present attitudes
to the environment and understanding of environmental impacts.
Future generations may value the environment more, especially
in the context of ongoing environmental degradation;
- there should therefore be a strong presumption
in public policy in favour of preventing irreversible environmental
changes such as climate change or biodiversity loss. Such a presumption
cannot credibly be captured in monetary terms.
58. Given the pace of environmental change, monetary
valuations can be expected to alter significantly as our scientific
understanding increases. Work carried out for DEFRA some two years
ago suggested that carbon emissions should be valued at about
£70 a tonne.[89]
By contrast, a recent paper presented by Professor Pearce suggested
that the value of carbon might be as little as £3 a tonne,
with an maximum value of £15 per tonne.[90]
We are interested to see how the Government will respond to such
analyses, as acceptance of such a value would make it difficult
to justify large parts of the Government's Climate Change programme.
By tying policies to specific valuations in order to justify them,
these policies could be completely discredited if the weight of
academic opinion moves against the valuation. To guard against
this, only valuations which command a wide consensus in terms
of both their assessment of environmental impact and their methodology
of valuation should be so used. Neither of these conditions hold
in respect of Climate Change.
59. We also believe that inter-generational equity
and the limitations of our current understanding are crucial here.
If it were to turn out that we have grossly underestimated the
impacts of global warming, for example, we might realise in 100
years time that we should have been placing a value on carbon
of £700 per tonne. Yet the Government's own interpretation
of sustainable development does not appear to place very much
weight on inter-generational equity. In rejecting an amendment
to substitute the Brundtland definition of sustainable development
in the International Development Bill, the Minister stated: "We
believe that the (Brundtland) interpretation is excessively narrow
and puts undue emphasis on environmental concerns¼The
Brundtland definition lies at the environmental end of the spectrum
of views on sustainable development. At the other end, there are
equally sound definitions that favour a fundamentally economic
definition."[91]
60. Moreover, even the Treasury itself does not appear
to place too much reliance on monetary valuation. In this respect,
its approach is inconsistent. While favouring monetary valuations
as a basis for introducing environmental taxes, it appears to
be quite happy once those taxes are introduced to increase them
substantially to levels which are probably far higher than it
could justify on such a basis. The rate of the Landfill Tax, for
example, was initially calculated on the basis of cost externalities,
but the Government now seems happy to raise the cost of landfill
by nearly 300% without having revisited this analysis. The justification
for doing so is that much higher levels are required to bring
about behavioural change. Similarly with biofuels, it is interesting
that the Economic Secretary himself admitted that setting the
rate of duty was "by no means a perfect or a scientific process",[92]
and that the Government has in practice priced bioethanol significantly
lower than its own monetarised benefit analysis would suggest
is justified.[93]
61. We are therefore concerned about the emphasis
which the Treasury is now placing on evaluating environmental
impacts in monetary terms, and the adoption of such an approach
for the development of new environmental taxes. Our view is that
this could result in a superficial and specious numerical accuracy,
and that the Treasury may use such an approach for limiting the
scale of environmental measures, even when it is apparent that
far greater cost increases might be required in order to achieve
the behavioural changes that are required to deliver the desired
policy outcomes.
62. Environmental taxes still raise very little
money.[94] It
is our belief that, if the huge scale of the environmental challenges
facing us are to be addressed, environmental taxes and fiscal
incentives will need to play a far larger part than they currently
do. Our own view is that the Government should use such instruments
flexibly to support environmental policy objectives, targets,
and standards; and use monetary valuation only where it can credibly
capture the major costs and benefits.
Resource productivity
63. In 1999, the Government made a commitment
to the development of resource productivity indicators.[95]
This agenda is being pursued for various reasons including, at
a company level, the drive for greater efficiency and cost savings.
However, with regard to the UK as a whole, our concern is that
the present set of sustainable development indicators—in
particular the headline indicators—fail to reflect adequately
the UK's unsustainable use of resources. They therefore give too
positive an impression, and understate the extent of the challenge
facing the UK.
64. A considerable body of research has been conducted
on resource productivity measures. A review by DETR dating from
2001 lists various approaches and discusses in detail their strengths
and weaknesses.[96] Despite
such research, there has been a pointed lack of progress and we
seem to be no nearer agreement on possible indicators in this
area than we were some four years ago when the DTI were promising
us significant progress on this score. And the Government has
still to respond to the 2001 Performance and Innovation Unit (PIU)
report on Resource Productivity.[97]
65. In Tax and the Environment, the Treasury
quotes from the work carried out a couple of years ago by the
Wuppertal Institute on UK material flows.[98]
It uses this to suggest that resource use in the UK has not materially
changed over the last 30 years, despite a substantial increase
in the output of the UK economy, and that this indicates an improvement
in resource efficiency. But in our view the Wuppertal study raised
at least two concerns—firstly, the poor quality of UK data
(necessitating in some cases the use of data from other countries);
and secondly, the fact that the indicators used still do not fully
convey the extent to which the UK is environmentally unsustainable.
66. By contrast, ecological footprinting—one
of the various possible approaches to measuring resource productivity—suggests
that we would need a planet some four times the size of the Earth
if all nations were to live in a manner similar to ourselves.
For all its problems as a robust and scientific measure, ecological
footprinting is potentially a powerful communicative tool, and
we note that Wales, for example, has adopted this technique as
a measure of its resource use.[99]
However, as we have previously pointed out, there are other possible
approaches, such as the concept of sustainability gaps, which
might provide a better basis for an overall measure.[100]
67. DEFRA are leading work on resource productivity,
but the DTI and the Treasury also have significant responsibilities
in this area. The importance of making progress here has been
thrown into sharp relief by the recent commitment made at the
World Summit for Sustainable Development for all states to develop
sustainable consumption and production strategies - a huge and
daunting challenge. Once again, DEFRA is leading on this and is
planning to release a document in the summer.[101]
68. There can be little doubt that the UK's present
use of material resources is unsustainable,[102]
and the choice of resource productivity indicators must adequately
reflect this. Resource productivity issues should be as
prominent in the Pre-Budget Report as labour or economic productivity.
We consider that the Treasury should be playing a much more active
role in pushing forward development in this area.
Internal Audit review of environmental
issues
69. In its memorandum for our 1999 Greening
Government Report, the Treasury stated that "a specific environmental
audit, addressing all issues, is a topic in the assessment of
audit need to be put to Treasury's Audit Committee in 2000".[103]
Progress on this commitment has proved to be rather slower than
we would have wished. We were pleased to learn in November 2002
that the audit was finally being carried out,[104]
and we look forward to the outcome of the review which we trust
the Treasury will make fully available to us.
69 Environmental Audit Committee, Second Report of
Session 2001-02, Pre-Budget Report 2001: A New Agenda?,
HC 363-I, January 2002. Back
70
Environmental Audit Committee, Fourth Report of Session 1999-2000,
The Pre-Budget Report 1999: Pesticides, Aggregates and the
Climate Change Levy, HC 76-I, paragraph 111. See also the
Environmental Audit Committee's Second Report of Session 2001-02,
Pre-Budget Report 2001: A New Agenda?, HC 363-II, Ev 10. Back
71
The Treasury's response was published in July 2002 as the Environmental
Audit Committee's Second Special Report of Session 2001-02, HC
1000. Back
72
Contrast appendices 1 and 2 of the Environmental Audit Committee's
Second Report of Session 2001-02, Pre-Budget Report 2001: A
New Agenda?, HC 363-II, Ev 1ff and 10ff. Back
73
Budget 2002 press release HMT 2, 17 April 2002, page 5. Back
74
Ev 28, response to question 1. Back
75
Ev 28, response to question 2. Back
76
Ev 28, response to question 4. Back
77
Tax and the Environment is one of a number of associated
documents published with PBR 2002. It can be found at:
http://www.hmtreasury.gov.uk/pre_budget_report/prebud_pbr02/assoc_docs/prebud_pbr02_adtaxenvir.cfm. Back
78
See paragraph 2 and footnote 3 above. Back
79
2002 Spending Review: Public Service Agreements, Cm 5571,
HM Treasury, July 2002, chapter 17. See:
http://www.hmtreasury.gov.uk/spending_review/spend_sr02/psa/spend_sr02_psaindex.cfm. Back
80
Second Report of the Environmental Audit Committee, Session 2001-02,
Pre-Budget Report 2001: A New Agenda?, HC 363-I, paragraph
37. Back
81
See footnote 2 above. Back
82
For the Statement of Intent on Environmental Taxation,
see paragraph 1 and footnote 2 above. Back
83
Pre-Budget Report: Stability and steady growth for Britain,
Cm 4479, HM Treasury, November 1999, page 101 paragraph 6.24. Back
84
Budget 2002 announced an increase of 1% in the rate of national
insurance contributions (NICs) from April 2003. See Pre-Budget
2002 press notice REV/HMT 1. This followed a 0.3% reduction in
contributions to compensate for the introduction of the Climate
Change Levy in April 2001 (see PBR 2002, page 132 paragraph 7.13). Back
85
Ev 38. See also Next steps for energy taxation: A survey of
business views, Green Alliance, November 2002. Back
86
For Tax and the Environment, see paragraph 48 above. Back
87
Paragraph 11 above. Back
88
The requirement that environmental policies should be based on
sound evidence was first introduced by the Government in the1999
Pre-Budget Report (see paragraph 45 above). See also chapter
5 of Tax and the Environment. Back
89
Estimating the Social Costs of Carbon Emissions,
Government Economic Service Working Paper 140, January 2002. See:
http://www.hmtreasury.gov.uk/media//2E817/SCC.pdf
. Back
90
The Social Cost of
Carbon and its Policy Implications, Pearce, August 2002, page
23. The range is only £3 to £6 if equity weighting is
excluded. The use of a time-varying discount rate would increase
the figures slightly. Back
91
House of Commons Hansard,
Debates, 10 April 2001, Col 886-887. Back
92
Q 6. Back
93
QQ 4-10 and paragraph
11 above. The Government has in fact based the 20p cut not on the
monetarised value of environmental benefits but on a calculation
of the extra production costs of biofuels compared to conventional
fuels. British Sugar and Cargill argue that the Treasury has underestimated
the extra production costs, and that a larger reduction in duty
is therefore required to stimulate UK production. See Ev 40-46. Back
94
Excluding fuel duties,
which were introduced primarily for raising revenue, the largest
environmental tax is the Climate Change Levy which raised £0.6
billion in 2001-02. Back
95
Quality of Life Counts,
DETR, December 1999, page 251 and 289. Back
96
Sustainable Prosperity:
Measuring Resource Efficiency, DETR, April 2001. The paper can
be found at:
http://www.defra.gov.uk/environment/sustainable/research/prosperity/pdf/sustainable_prosperity.pdf. Back
97
Resource Productivity:
making more with less, Cabinet Office, November 2001. Back
98
Op.cit., paragraphs
3.13 to 3.17. For the Wuppertal study, see DEFRA press release of
17 June 2002. Back
99
National Assembly for
Wales press release dated 17 April 2002. Back
100
Environmental Audit
Committee, Fourth Report of Session 1999-2000, The Pre-Budget
Report 1999: Pesticides, Aggregates and the Climate Change Levy,
HC 76-I, paragraph 108. It is also interesting to note that the
full Wuppertal Study, Total Material Resource Flows of the United
Kingdom, (not available on the DEFRA website) concludes by recommending
on page 118: "In the future, monitoring the actual material
flows and derived indicators should be supplemented by distance-to-target
records." Back
101
DEFRA press release
41/03, dated 6 February 2003. Back
102
Including the use of
pollution sinks (eg the ability of the atmosphere to absorb carbon
emissions). Back
103
Environmental Audit
Committee, Sixth Report of Session 1998-99, The Greening Government
Initiative 1999, HC 426-III, page 129. Back
104
Sustainable Development in Government: First Annual Report
2002, DEFRA, November 2002. See part 2 (available only on
the web at: http://www.sustainabledevelopment.gov.uk/sdig/reports/index.htm
), HMT response to question 2.4. Back
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